The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

October 10, 2016

Fiscal insanity in Brazil

I have to admit that I do not understand the conventional wisdom that pins Brazil’s current recession on Dilma’s fiscal policies. I kind of understand that profligacy made the situation worse, by forcing the central bank to raise interest rates by more than it otherwise might have done in the face of higher inflation. But that is a second-order effect. I completely understand the argument that most federal spending in Brazil is misplaced and the state serves as a drag on long-term growth. But that is a long-term problem that has to do with the nature of federal spending and not the absolute level.

In other words, the proposed constitutional amendment to limit the level of Brazilian spending to the level of inflation for the next 20 years seems crazy. But it is actually even crazier than that. The amendment would not include the following:

The revenue that the federal government has to turn over to the states under Articles 157 and 159 of the constitution (49% of all income tax revenue, 10% of VAT revenue and 29% of all hydrocarbon revenues);

These categories are overlapping, so it is not clear how much total spending is exempted. But it is a lot. Unfortunately, a lot of basic state functions are hit, like, you know, police, courts, universities, public defenders, and most regulatory agencies. But not the fastest-growing ones and not the ones that generate the most waste.

In other words, it is crazy on every level. It is a crazy proposal that gets worse in implementation!

I call on Aldo Musacchio or Lee Alston for help. Help? Why is President Temer pushing this?